Aviation Forecast Conference - The Boyd Group, Inc.

The 11th Annual

Aviation Forecast Conference

CNC's: The Growth Sector
US Passenger Forecast
Mergers
Low Cost Carriers
Small Jet Providers
Regulatory Issues
VLJs
Global Fleet Forecast

Conference Presentations
Available. Click Here

Click Here For
Highlights of The 2005
Conference, Click Here.

The Boyd Group, Inc.
Advisors to the Aviation Industry
Since 1984
78 Beaver Brook Canyon Road
Evergreen, Colorado, 80439
303-674-2000
303-674-9995 Facsimile
aviation-info@aviationplanning.com

Highlights of The 2006 Event

Steady Traffic Growth.
Strong Demand For Single-Aisle Airliners.
Our Prior Forecasts Regarding Legacy Carrier Strengths Now Borne-out

This year, the The Boyd Group Aviation Forecast Conference was the largest and best-attended yet. Over 200 aviation leaders and professionals were in attendance, and the lineup of speakers was the strongest in the event's 11-year history.

Attendees experienced real forecasts as well as presentations from the real decision-makers in aviation. Without question, this is now aviation's premier forecast conference.

Alphabets Came Knocking. Based on this, it's no surprise that one of the major Washington airport alphabet groups contacted us earlier this year, asking to be "a part" of The Boyd Group Conference - it's where their members are heading annually to get a clear view of the future, instead of to sloppy events in Washington, featuring bloated bureaucrats making bloated presentations that say nothing.

Not to worry, we're not interested in any "alliances" with alphabet groups - we've found that our independent approach makes them very nervous, lest we state something politically-incorrect. (That's among other things we discovered dealing with these folks, which we won't go into).

Again The Year: The Real Decision-Makers In Attendance. We were very honored by the scope of the conference speakers and attendees. Among the over 200 attendees, the mix included aircraft manufacturers Embraer, Boeing and Airbus, all presenting. In addition to the airline attendees, airports of all sizes were represented, from Pellston, Michigan, to DFW International. Financial houses and OEMs were there, too. Representatives from three major airline labor groups, AMFA, Southwest Pilots, and the Allied Pilots Association joined us as well.

The wide scope represented at the conference is reflective of the fact that this event is laser-focused on providing information that is a) pertinent to the future of the aviation industry, and b) not available anywhere else.

Great Attendance. Great Participation

We want to thank our sponsors for their support of the conference.

We have special thanks for the following, too:

Embraer Aircraft providing two E-190 models for a drawing for the attendees.

Airbus for providing a model of the A-380 for a drawing.

Boeing for providing a large 747-8 model

Southwest Airlines - providing two tickets anywhere they fly

Delta Air Lines - providing two tickets anywhere they fly in the world.

We enthusiastically want to thank the Salt Lake City Department of Airports for being our host and for sponsoring a wonderful evening at Robert Redford's Sundance Resort. Although it got a bit rainy, and at the top of the lift, a bit snowy, everyone had a great time.

Also, the welcome reception sponsored on Sunday afternoon by Embraer was a huge success, with cocktails out on the deck at Stein Eriksen's in the warm October sun.

It was a wonderful forum where leaders from all areas of aviation - manufacturers, airlines, labor, airports, financial institutions, and suppliers - were able to mix, get to know each other, and find common ground.

Maybe, Just Maybe, The Airline Industry's Out of The Tunnel

Last year, The Boyd Group forecasts presented at the 2005 Conference indicated that the airline industry might have been seeing the end of the tunnel of high losses, turmoil, and bankruptcy filings. This year's forecasts now validate those predictions.

Comprehensive Network Carriers - The Growth Sector

Now Obvious: It's The Revenue, Not Just The Costs. In our past conferences, our forecasts outlined how access to emerging revenue streams would eclipse operating costs as the key to airline industry success. We noted the "Shreveport-Shanghai Advantage" as an example of how it was "legacy" carriers (what we now define more correctly as "Comprehensive Network Carriers") that held the future - and it was LCCs that were in danger.

Naturally, the usual suspects in the Washington consultant crowd and most of the financial shamans on Wall Street back then got a good laugh from our forecast. It went against accepted wisdom. (Of course, if Columbus had accepted the "wisdom" of these folks' forebears, today we'd all be running pizzerias in Milan.) On the other hand, attendees at our Conferences had a much wider, and more accurate picture of the future.

Today, just listen to these Washington "experts" now "predicting" a slowing of the LCC model. Wonderfully insightful, especially after a number of LCCs have reported disappointing earnings and have slowed aircraft deliveries. Memo to Wall Street: after it happens, it isn't a forecast. It's a history lesson.

LCC Profits: Fundamental, Not Temporary. The recent set of CNC operating profits are not due to exceptional cercumstances, but due to fundamental changes in the industry. Costs are indeed down. A strong economy is maintaining demand. Capacity constraint - at least within the Comprehensive Network Carrier segment - is in place. Even better, fuel costs are moderating, and these carriers are generally well-positioned to take advantage of the new growth sectors - the Deep South, the Upper Midwest, and Asia.

This doesn't portend massive increases in capacity, but instead, measured growth that will track with the traffic that these CNCs want to capture. In fact, it will be difficult for these carriers to mess things up - because none of them have excess new capacity on order. Further, when the economy starts to slow - which it will at some point - several of these carriers have natural "safety valves" in the form of aircraft that can be pulled from service relatively cheaply.

Key forecast issues regarding CNCs:

Capacity: Will track mostly with slow increases in demand. There are no dynamics that point to more than @ 3.0% annual growth for the foreseeable future.

System Expansion, Not Domestic Contraction: International traffic flows are the new objective. The lightweight consultants and financial analysts have mis-read CNC international expansion as some sort of a last resort by these carriers to escape domestic LCC competition. Wrong.

It'd be nice if these folks had a clue. Carriers such as Delta, Continental, and Northwest are adding new international markets to strengthen, not abandon, their domestic route systems.

Fact: there has not been a single major domestic market that a CNC has abandoned in favor of international expansion. Northwest adding DTW-Brussels, for example, only adds more high-yield traffic to its domestic network - traffic that LCCs cannot touch.

The domestic revenue growth points, as was pointed out back at the 2004 conference, are now manifesting in the Deep South and in the upper Midwest.

Trans-Pac: It's Going To Get Nasty. Of interest is the coming battle in trans-Pacific markets. Loren Aandahl, Director of International Pricing and Scheduling at Northwest, outlined the competitive disadvantages the US has maneuvered itself into with questionable visa requirements for Chinese citizens. The hassle level to obtain the paperwork to permit travel to the US is causing substantial new traffic growth - and economic development - to gravitate toward the European Union.

This is in addition to The Boyd Group's analyses of future trans-Pac competition. By 2012, it is more than likely that Chinese carriers will have market share "parity" across the Pacific, and be major competitors to US airlines. It will be these carriers that'll be signing code-share agreements with Delta at ATL, American at DFW, and Continental at IAH to get US domestic feed. In short, it will be them barging in here, wanting a bigger piece of the air travel action across the Pacific.

Advantage: 787 Operators. On the bright side, Mr. Aandahl outlined the expected trans-Pac advantages Northwest expects with the Boeing 787. It is an aircraft that has half the capacity of the 747-400, but will operate at essentially the same seat-mile costs. (Do the math).

Because Northwest saw this value early in the 787 development cycle, as it stands today they will have about a four year window of opportunity to exploit the Pacific before another carrier will be able to bring any substantial numbers of 787s into the trans-Pacific market.

Delta's Not Asleep, Either. Ed Bastian, CFO of Delta Airlines, went over his carrier's progress in moving toward exiting from Chapter 11. In the past year, a whole new approach to revenue, market expansion, and product delivery have been implemented at Delta, and the carrier expects to exit bankruptcy sometime next year.

Labor: The Next Major Challenge

One of the emerging trends outlined at the conference is the pending labor challenge in the US airline industry.

This time, it's not labor costs, per se, but the hurdles to attracting the professionals that the industry will need in the future. The post-9/11 cooperation between management and labor, while painful and at times contentious, has turned the industry around. That much said, as the industry recovers, which it is doing today, some of the sacrifices made by employees will need to be reversed, or else the industry will find itself in a world of hurt trying to attract professionals.

This is already painfully obvious at the Small Jet Provider level. Pay and benefits are so low at some operators that one sometimes wonders if the uniform at the employee's previous employer was an orange jumpsuit.

Service quality at some of these carriers has descended to the level that in some cases small communities are actually getting letters from companies stating they may not invest in new facilities in the region because of the quality of the air service. Not necessarily the level of air service - but the raw near-thuggery they witness or see passed off as "customer service" by some of these SJPs representing major carriers. Point: airlines are becoming less of a career, and, at least in some cases at the SJP level, simply a stop on the burger-flipping circuit.

At major carriers, the wrenching changes since 9/11 have indeed changed the industry, but at some point, those concessions made across the bargaining table will be under pressure to be reversed. The industry has changed, it is true. But to attract and retain quality staff in the future, there have to be incentives in the area of compensation. Keep an eye on this trend.

US Passenger Traffic Forecast

As our Conference attendees were advised earlier, the airline industry is focusing on revenue growth, not passenger growth.

Therefore, capacity constraints will result in relatively low enplanement growth over the next five years. There are no dynamics in place to indicate any spikes in traffic for the foreseeable future. To the contrary, new airplanes that are coming on line at CNCs will be used mostly to re-fleet, not necessarily expand.

In the LCC area, the bloom is off the growth pumpkin, with jetBlue and AirTran pulling back on expansion.

Even in the event of a moderate economic downturn, the comprehensive network carriers are in good shape to get through it. Northwest, American and Delta, for example, all have significant amounts of capacity that, should traffic go south, they can pull down relatively quickly and cost-efficiently.

The only major wild card is Southwest. In the face of a declining growth potential for the traditional LCC model, WN’s strategy appears to be to use its expanding fleet to spread out its costs over a wider ASM base. But to make that work, it must create new RPMs with those additional ASMs. That means Southwest must increasingly go head-to-head with other carriers, fighting now to take market share almost as much as trying to create new traffic with low fares. This is not to say that WN hasn’t been doing this over the past decade, but with most of the easy-meat markets gone, it faces a re-generated CNC airline sector that has much stronger system revenue flows.

The complete Airports:USA forecast is available by subscription at AirportsUSA.com, and is updated and revised consistently throughout the year to reflect shifts in airline strategies at specific airports. Most recently, for example, the forecast for SWF has been adjusted to reflect the entry of AirTran and jetBlue.

Mergers & Consolidations

Trendy Pipe Dreams That Greed Might Make Reality. There's the belief that if we can just get a couple of carriers to merge, the result will be fewer seats, and then the industry can raise yields and all will be well. We don't see that happening. We've covered the myths that swirl around mergers earlier.

The current forecast indicates that any consolidation between major, overlapping airline systems is very unlikely. However, United has put itself up for sale, and has hired a realtor in the form of Goldman Sachs. If that entity can hornswaggle a deal that promises a huge return to another carrier's shareholders, then all bets are off. If a board of directors are faced with a proposition that can bring in multiples for the stock value, then it's a done deal - regardless of the wreckage it could leave behind.

The current dynamics in the LCC sector indicate that there could be some marriages between players that will find themselves in the competitive tar pit of lower growth and increasing intra-LCC competition. Any potential set of combinations in this area, however, would be based on the Studebaker-Packard concept: not many synergies, but the idea is that if the combined entity gets bigger by merging, maybe somehow it can survive. Don't bet on it.

Providing conference attendees with a well-considered and very well-supported argument to the contrary, we were honored to hear from Doug Parker, CEO of US Airways, in regard to the progress that his company has made in bringing two very disparate carriers together. Mr. Parker, in contrast to some of his peers, as well as our forecasts, firmly feels that additional consolidation is absolutely in the the cards.

Mr. Parker outlined the progress he and his team have made in putting two geographically-separated carriers together, noting the fact that in the process the new entity has been able to eliminate 15% of the former combined fleets, without any reduction in revenue stream.

Low Cost Carriers - Fasten Your Seatbelts

And that brings us to the issue of the LCC sector. We had a lively fireside chat this year with Jeff Potter, CEO of Frontier Airlines, reviewing very candidly the issues facing this segment of the industry, and how his carrier is addressing them.

At the 2004 and 2005 Forecast Conferences, analyses by The Boyd Group outlined exactly what is starting to now manifest in this part of the airline industry. Growth prospects are declining. Intra-LCC competition is increasing, and the model is starting to run low on easy-meat expansion markets. As of today, we expect to see a further, and possibly nasty, shake-out and re-structuring of this segment. And as noted above, there aren't any real lifeboats to be found in the form of these carriers trying to merge with each other, either.

It's not that traffic demand is necessarily slowing, but instead, the natural limits to the number of markets where price alone can fill 100- to 150-seat jets with substantially net-new passengers are starting to be reached.

Do watch for the usual suspects in the consulting and financial world to start "predicting" this, now that it's obvious.

Small Jet Providers

Without question, this is the most turbulent segment of the air transportation industry, one that some still call "regional airlines."

The need for 50-seat jets is declining, consumers are beginning to rebel inside RJ cabins, and the economics are getting weaker and weaker. (Buttressing this, Doug Parker noted that US Airways has too many 50-seaters.)

To give a perspective of this area, Jerry Atkin, CEO of Skywest, participated in a laid-back fireside chat with Mike Boyd regarding where he sees things going.

Without question, costs and quality of service delivery, according to Mr. Atkin, are the key factors to SJP survival in the future. In some instances, it's not labor costs, but instead the entire ingrained expense structure that some SJPs have allowed to develop over the past decade. Cost-plus deals with major airlines had one big downside: it has left some SJPs very vulnerable now that costs have to be brought down.

Fuel Issues

Again this year, John Armbrust, president of Armbrust Aviation, briefed us on the future for jet fuel prices.

While some of the emotion is gone from the market, as he forecast at last year's conference, the likelihood is for oil to remain in the $55 to $65 price range, based on a range of factors. Perhaps the drop seen in the summer of 2006 is reaching that floor, particularly when OPEC just signaled an intent to decrease production.

In regard to jet fuel, another major issue facing airlines is distribution. "Jet fuel is an ugly stepchild," Mr. Armbrust noted. New ultra-low sulfur diesel fuel gets "contaminated" if it is flowed through a pipeline that also is used to carry jet fuel, raising the cost and the difficulty of moving airplane go-juice over pipelines. Limited US refining capacity also has resulted in jet fuel being imported from other nations, a couple of are run by political Space Cadets, such as Venezuela.

Finally, the just-in-time nature of jet fuel distribution makes several large airports vulnerable to shortages if any of the distribution system is disrupted. The basic conclusion from John was that high jet fuel prices are here to stay, and the need for airlines to plan ahead will grow in the next few years.

Regulatory Issues

Again this year, we were fortunate to have Jim May, President of the Air Transport Association, present the overall regulatory views of the airline industry.

FAA re-authorization was covered, including the ATA's position that the funding mechanisms for that agency must be shifted to place a greater portion of the burden on general and business aviation.

Mr. May, as usual was refreshingly "un-Washington" in his comments, including making the point that the FAA itself needs to be re-thought and re-structured, with limits on the invasive nonsense it must put up with from Congress and politicians.

Air Service Development

A very lively fireside chat session was held, including John Jamotta of Southwest, Karen Zachary of Continental, and Scott Tyra of Allegiant. As always, John was blunt, direct, and to the point - Southwest is focused on markets that contribute to its system, and side trips are not in the plan.

Karen advised airports that carriers already have a lot of the information they need regarding most destinations to which they may consider adding service. The key is to not waste airline planners' time - get to the good stuff, the things that are of value to the carrier and which the carrier doesn't already know about.

Scott Tyra of Allegiant was absolutely refreshing. His no-nonsense, heavily factual delivery could not mask what has to be one of the airline industry's best senses of humor. He went over the unique product that Allegiant offers, and although his carrier is in the "quiet period" of an initial public offering, limiting much of what Mr. Tyra could say or imply, it was very clear between the lines that this entity is going to be much more of a force in the travel industry in the future.

Very Light Jets

John Knudsen, Co-Founder of Adam Aircraft, reviewed for the attendees what is likely the hottest current issue in aviation - VLJs. He clarified what this new category of aircraft is, and what it is not. He illuminated for the conference the differences between the various players in the VLJ field, and just what we can expect from these aircraft as they enter service.

Fleet Demand

Under 70 seats is out. Anything with an RJ cabin, regardless of number of seats, is on its way out. E-Jets are filling in the mainline jet categories vacated by DC-9s, F-100s, and 727-200s. Anything over 300 seats is problematic. The real demand is in the middle - between 90 seats and roughly 50 seats.

Summarized, The Boyd Group Ten Year Global Fleet Forecast indicates:

Global Demand: 11,132 new airliners in the 70 to 300+ seat categories through 2017

Geographic Demand: North America will comprise less than 32% of this demand

Main Capacity Categories: Over 42% of the new airliners will be <126 seats

Regional Jets: Dead. Gone. And the Embraer 170/190 are not "regional jets." Fact: the size and mission applications of these aircraft are right in line with DC9-10/30s and 737-200s, and the 195s have as many seats as the first Boeing 707s. So much for "regional" - a term that most of the analysts using it couldn't define on a bet

Fleet Size Growth: China: 179%. North America: 36%. In fact, it is possible that demand from China will be greater in terms of absolute numbers than that from North America

Wild Cards: Composite versions of the 737 or A-320 could well shift demand for new units to later in the decade

The complete Boyd Group Global Fleet Forecast will be published November 1, 2006, and will be available by ordering on-line.

Manufacturer Presentations. We had great presentations this year from both Boeing and from Airbus. Without bloodshed, and with a good deal of fun.

Richard Wynne outlined the 787 program and Boeing's view of future demand in the area of both narrow-body and wide-body aircraft. Boeing was also kind enough to provide a very large 747-8 model for the audience.

Airbus this year was finally able to shake loose an executive to come and give their side of the story. (We try every year to get Allan McArtor, but understandably, he's got a company to run.)

At this year's Conference, Airbus more than made up for past years, sending Simon Pickup - Director of Market Forecasting, to present their company's views of the future. It was nothing short of excellent, and incredibly informational to all in the room. One of the reasons is that Mr. Pickup cannot be accused of being either dry nor boring, having a robust sense of humor.

Or annual sponsor, Embraer, provided an update on the E-Jet and the enormous market acceptance of that airliner platform. Designed to fill a demand niche vacated by the out-of-production DC-9, F-100, and 737-200, the E-Series has propelled Embraer into the number three position in global airliner manufacture.
_________

Conference Presentation Binders are available for $595. E-Mail request to info@AviationPlanning.com. Note that hardcopy presentations were not provided by Delta, Northwest or Allegiant.

Next Year - Sarasota!

We're happy to announce that the 12th Boyd Group Aviation Forecast Conference will be hosted again by Sarasota-Bradenton International Airport, and will be held at the Hyatt Sarasota on October 14-16, 2007.

We've already established a great list of speakers. Details will be announced in January, so clear your calendar.